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The stock market's "fear gauge" is flashing a fairly atypical sign for what is usually the market's quietest period of the year.
The Chicago Board Options Exchange's volatility index, or VIX, has jumped 13% this week as trading volume thinned due to the holidays. The measure is still down 24% from levels earlier this month. But the fact that it is hovering above its long-term average of about 20 is uncharacteristic heading into the end of the year, and represents the latest cause for concern for investors.
The VIX uses options pricing to measure the market's expectations for future swings in the Standard & Poor's 500-stock index. It tends to rise when stocks fall. The S&P 500 was recently down 14 points, or 1.1%, to 1251, as investors fretted about the euro sinking to an 11-month low ahead of Italy's long-term debt auction on Thursday.
The VIX was recently up 1.44, or 6.6%, to 23.35.
The previous instances when the VIX finished a year above 20 was at the end of 2008 and 2009, when markets grappled with the financial crisis and its aftermath. The time prior to that was in 2002, when investors reeled from the burst tech bubble.
"We're seeing a little bit of fear creep back into the market here before the end of the year," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management. "Within that context, it's important to keep in mind that we're under levels that we've seen just a few weeks and few months ago."
The VIX finished 2010 at 17.75 and started the first few months of the current year in a relatively tight trading range. It shot above 30 in March after the earthquake in Japan, but quickly reverted to the long-term average for much of 2011's first half.
But the VIX hit a 2011 high of about 48 in early August following the rancorous U.S. debt-ceiling debate and S&P's downgrade of the U.S. credit rating. It remained elevated for months as stocks swung wildly in both directions for much of the summer and the fall. The VIX was even above 30 as recently as early December.
Michael Farr, president of portfolio-management firm Farr, Miller & Washington, said he doesn't see volatility subsiding going into 2012. Continued worries related to the European sovereign-debt crisis and further political wrangling in the U.S. are likely to weigh on markets once the calendar flips to 2012.
"The VIX is telling you the choppy, stormy conditions are not going away," Farr said. "We have not seen the last serious spike in the VIX."
Specifically, the daily chart of the VIX is showing a bullish Falling Wedge pattern with a target 47.5, but it is unclear where and when its apex might be put in and this means it is unclear as to when this bullish pattern might begin to fulfill up. It could be tomorrow with the apex having been hit last week or it could be weeks from now on an apex that could be as low as 17.5.
Clearly, these differences will show up in the equity index charts in somewhat and rather imperfect inverse fashion even though there continues to be a nice bearish Rising Wedge in the chart of the S&P as has been shown in the Dow Jones Industrial Average many times recently.
Might that pattern with a target of 1075 peak out a little higher? Absolutely, but so long as it does not exceed 1350, it seems that the bearish Rising Wedge has an excellent shot of fulfilling down.
What makes a potentially higher peak in the S&P’s Rising Wedge so interesting is the fact that it would “match” a lower apex in the VIX’s Falling Wedge with both appearing likely to find bearish resolution within a few weeks at the most if not much sooner.
Such an observation seems supported by the long-term monthly chart of the VIX that shows a Sideways Trend Channel between about 10 and almost 40 with an inner level around 16.
Unless you think that a period of economic expansion that accompanied the bull market of 2003 to 2007 is ahead, it seems most likely that the VIX will trade perhaps as low as 16 or so before ricocheting back up toward 40 or even to the 47.5 target of the Falling Wedge shown first.
In turn, it is not clear when this might happen in the first quarter of this year, but it is clear that some bearish volatility will return to the S&P.
I'll try to give more detail in the future....as far as the million dollar stuff goes I'm kind of afraid of getting to much attention and end up like Cj Booth and Bugsbunny et al ( getting overwhelmed and end up leaving ). I do get some really good trades but get some turds too so that's why I"ve been comfortable pointing out some levels of interest and let people decide whether or not they get PA they like to act on them. I have thought of just posting when I am going to jump on something but in the heat of the moment I forget. I will try in the future and then later explain what I was looking at, I don't want to babysit though as I'm sure you understand.
Before I make any comments about anything I just want to mention that in my experience "normal" trading probably won't really resume until about Jan 17th-18th. That's not to say there won't be trades but it's likely to be goofy til then....
Above is the daily Ichimoku, the obvious thing standing out like a sore thumb is the shooting star/pinbar/doji thingy.
We really need to see what tomorrow ends up at to determine what to do with this thing...I wouldn't want to just enter on a break of this thing at this point because it's to risky for a couple reasons. From a Ichimoku perspective we are in bullish territory and depending on entry methods you could be long already and this could tap the low and bounce right back up.
Secondly you really need confirmation by having tomorrows close to be below this thing to consider a short because it could be that the bulls are just taking a rest and will come back and run it up again.
Some spots to watch....745.5, 742, 734.5 and on the upside 764-5 area, maybe the 772.5 area
I am curious @kbit in that selling into support like this sounds scary to me, so how would you handle it? Are you going to wait for it to break through some zones and then head short or are you going to look for bounces on support to go long?
I would not be nervous at all actually...like I said we have to see where tomorrow ends. If it does drop 736 is my first real concern but we really need to see how it plays out tomorrow....how far it drops or if it even drops at all and so on....you know what I mean. If you want to get a bit more confidence just look at the weekly chart and on that you can more easily see some downside potential. I would like to see a move down to about 705 actually.
Like I said tomorrows candle will say a lot...depending on where it closes. It's a lot of guessing at this point
Just remember some of the best trades are the ones that look the crappiest.....
Well I guess it wouldn't be any fun if it was easy.
The day is not over yet but looks like we will end up with a barbed wire mess here. Looking at it Ichimoku wise, it came down and touched the TS and bounced.....really that could have been a long entry right there (forgot to mention it yesterday). We still have to see where it closes (how low) but the short side doesn't look good...everything except for that pin thing says it's going up.
I guess I may be hoping for to much when I am looking for a good size pull back to go long but it's not over yet.
As a side note I was in the middle of posting something here about going long (earlier)at 739.5 but it didn't make it that far and it was the heat of the moment and didn't feel like chasing it or getting anyone else to chase it so I scratched it.
I had identified 742 as an area to watch and got a 2 pt bounce off it but it had no solid base PA wise so I figured it would fail .....739.7 was a floor trader pivot sittng right beneath it ...obviously that area held but like I said it didn't hit my entry and the PA after the bounce was kind of goofy.....which is no surprise really based on the time of year right now as I previously mentioned...blah blah blah....
